Domestic Bonds

Cautious in short-term markets: Amish Shah of BofA Securities

The Nifty benchmark will be around 14,500 by the end of 2022, says Amish Shah, head of India research, Bank of America (BofA) Securities. Since the beginning of this year, it has reduced the Nifty target twice – once from 19,100 to 16,000, then to the current 14,500. By setting negative prices, he thinks the markets could bottom out by August/September 2022.

Excerpts:

What is your Sensex of Nifty goal for the end of 2022?

14,500

Has there been a downward or upward revision to the Sensex/Nifty target since January of this year?

We recently (June 22) reduced our end 2022 Nifty target to 14.5k from 16,000. Our target at the start of 2022 was 19.1k

Indian benchmarks are down about 10% from their highs reached in October last year (they were down 18% until recently). Do you think Indian indices can enter a bear market with a drop of 20% or more?

Our target of 14.5k implies a decline of around 11% for Nifty from current levels. From the highs of nearly 18.5k in October 2021, our target would imply a decline of around 22%. Technically, this indicates a bearish market scenario. We continue to remain cautious on the markets in the near term as most risks are tilted to the downside: global macro concerns, including growing risks of recession in the US, potential for crude to remain at higher levels , with risks to spike to $150/bbl if European sanctions hit Russian production hard (at 20% earnings growth levels in FY23, among other factors.

Has the Indian stock market bottomed out? If not, then if you have to put a number or range for Sensex/Nifty low, then what would that be?

We have not put an explicit number for a bottom. But we note that most of the negative events above are likely to occur in the next 1-2 months or may see more clarity. In our view, factoring in these negatives could push markets down by August/September 2022.

Are we still in a long-term bull market with ongoing declines only technical corrections?

We do not believe that the current weak market performance is simply a technical correction. The tightening of global liquidity (previously the main driver of the bull market), the surge in inflation and the consequent strong rate reaction by the world’s major central banks and now the forecast for slowing global growth, including the fears of a recession in the United States, are all fundamental factors behind the weakness of most global equity markets.

REITs sold nearly $34 billion in nine months. Would REIT sales continue at the same pace or would you expect some sort of reversal or reduced pace of selling?

Although the strong sell-off has driven REIT ownership of Indian stocks to record highs of nearly 19%, it remains difficult to predict when these outflows will stop/reverse. We believe that the easing of global macroeconomic concerns or at least the emergence of greater clarity on this front, particularly on the likelihood of a recession in the United States, remains the most important factor behind of such a reversal of FPI flows.

Domestic institutional investors and retail investors provided strong support to the markets at a time when REITs were selling significantly. Do you expect this trend to continue or does the ongoing decline have the potential to affect these entries as well?

Some fear that rising yields will make debt/bonds an attractive investment alternative for domestic investors. But we expect strong DII inflows to continue based on our analysis since 2000, which suggests: (1) only a small negative correlation (-11%) between domestic equity outflows and inflows debt; (2) the overlap of equity outflows and debt inflows is observed only for 23%/29% of monthly instances, even when 10-year gsec yields were as high as >8%/>9%.

If you had to choose 3-4 sectors with a medium-term investment horizon, which would they be? Also, areas to avoid.

Given our current cautious stance, we favor a defensive strategy and are overweight sectors such as commodities, healthcare and utilities. We are also overweight the energy sector due to high energy prices and some domestic cyclicals (financials, industrials, autos). We are underweight Communication Services (5G auction overhang), High Discretionary Beta (slowing growth/valuation issues) and Materials (downgrade on price cuts).

Is now a good time to look for potential multi-baggers in small caps, or is it better to stay cautious and go for the blue chips?

We prefer large caps to small and mid caps, given our overall bearish view of the markets.